New Sovereign Wealth Funds Have New Remits

The previous decade saw a wave of sovereign wealth funds (SWFs) driven by a commodity market boom and foreign exchange reserves. Governments from Chile to the United Arab Emirates (UAE) use sovereign financial vehicles to diversify their economies and investment portfolios, secure intergenerational wealth and provide stability against shock events while aiming for better financial returns in more lucrative asset classes.

This SWF growth has provided markets with additional liquidity, and many of these funds have become leading limited partnerships in financial markets. Many other governments are watching the trend with interest.

The strategy is proving successful. Recent months showed a new wave of SWF, not driven by the typical economic forces that created the older funds, such as oil and gas revenue. Egypt’s main fund, the Sovereign Fund of Egypt, has launched a new separate sovereign industrial fund that will invest in various industrial sub-sectors in Egypt including, among other things, food, building materials, and manufacturing of railway and train supplies. This new model follows locally oriented funds, like Singapore’s Temasek, which traditionally supports national champions without worrying about the local economy’s inflated prices.

The proposed structure allows the Egyptian government to tap other pools of capital, such as other sovereign governments and funds, to serve as investors in the new vehicle. Reaching out to governments like the UAE will also strengthen regional economic and security cooperation.

Similarly, Ireland faces a significant surplus created by corporate tax paid by foreign multinationals. Towards the end of last year, it announced that it would establish two sovereign funds to absorb this revenue and reinvest in local and international markets. The government has started executing the plan in recent months and allocated around $100 billion to the funds, one of which also targets local and short-term assets. The new sources of capital for these emerging funds, the growing interest in local assets, and the revival of local industries reflect the latest political and economic environment designed to support local players in an inflationary and high-interest context.